To determine your maximum spending amount, or what is known as your credit limit, credit card companies look at a variety of factors. These are analyzed by underwriters who assess the risks of lending you money and define your limit.
Below you’ll find the common four factors credit card companies consider when deciding
credit limits, how to request a higher limit and the benefits and disadvantages
of a spending increase. This information can help increase your financial
literacy and understanding of credit.
Some credit card companies
have preset guidelines that determine your limit. For example, in the case of a
secured credit card, your limit is already set. If this limit is $500, you
cannot exceed that limit.
On the other hand, some cards
have what are called floating limits. These are determined by your income,
spending habits and any other factors that may fluctuate and provide the issuer
with a reason to change your limit. In this sense, you are provided with a
flexible limit but not an indefinite one.
The last type of limit you
may be given based on company guidelines is a minimum rather than a maximum
limit. This happens when the issuer states you have a minimum limit of $2,000. Keep
in mind that these limits can change according to other factors, so it is best
to contact your credit card issuer if you have any questions.
Your credit score may also
affect the credit limit a company offers you. Most of the time, credit card
issuers have a cutoff point for the credit score they accept. Having good
credit does provide you with the possibility of a higher limit, but that
doesn’t mean you will automatically be refused a credit card if you have bad
credit.
In fact, some companies may
accept your application even if you have poor credit, but they may give you a
lower credit limit to mitigate the risk. This allows you to build or begin to
rebuild your credit with a smaller spending limit that is safer for the issuer.
The next factor that
determines your credit limit is your credit report. This is a thorough document
that informs the issuer about all details pertaining to your credit. The
following is a list of some particulars that may be included in this account:
All of this information can
help credit card issuers determine if you are a low credit risk. Things like
applying for multiple accounts in the recent past and late payments make you a
higher credit risk. Your credit report provides more details than the credit
score, which allows the credit issuer to make a more informed decision about
your application and what your credit limit should be.
When calculating your credit
score, your income isn't taken into consideration. However, it is a large
factor for determining your candidacy for credit cards and setting a credit
limit. This is because credit card companies look at your debt-to-income, or DTI, ratio. This is your monthly expenses, such as car
payment, rent, student loans and credit card payments, divided by your monthly
income.
Credit issuers look at your
DTI to decide if you can handle another monthly expense on top of what you
already have. This doesn’t mean they will not approve your application, but it
does factor into the credit limit they give you.
Sometimes, you need a higher
limit on your credit cards. Whether that’s for an emergency, balance transfer
or even just a boost for your credit, there are two ways to receive an increase. The first is an automatic increase issued by
your credit card company.
Requesting an increase is the
other way you can receive a higher credit limit. Some issuers offer the option
of doing this online through your account, but most have you call the number on
the back of your card. The representative you speak with may ask you for
additional information such as your income, how much you want to increase your
limit and why you are asking for an increase. After taking these factors into
consideration, you're told if you qualify for an increase.
Being financially responsible
with your credit cards can result in you being eligible for a higher credit
limit. Paying your bills consistently and on time can also help prove to credit
issuers that you are responsible with your finances.
Receiving an increase on your
credit limit has many benefits. The biggest one may be the personal pride you
feel knowing that you are financially responsible and have proven that to
credit card issuers. Other, more tangible benefits of a limit increase are
listed here:
While having a higher credit
limit may be a good thing, there are a few disadvantages that come along with
it. For example, when you request a limit increase, the issuer looks at your
credit report. A soft inquiry doesn’t affect this, but a hard inquiry does and can make applying for other increases
difficult.
Another con of a higher limit
is that there is greater spending power. That means you have the ability to buy
more things than you have in the past, which can lead to more debt if you aren’t
careful.
Once you understand what
factors determine your credit card limit, you can better understand how credit
works. From there, you can work to improve your credit and make sure you stay
on top of your credit score. If you’re having trouble qualifying for a credit
card, sign
up for credit repair today
to take control of your credit and improve your finances. Your credit is in
your hands.
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